Use-of-proceeds bonds
Green bonds finance projects with environmental benefits, such as renewable energy, clean transport or energy-efficient buildings. Social bonds finance projects such as affordable housing, healthcare or education. Sustainability bonds combine both. The European Investment Bank's 2007 "Climate Awareness Bond" is often cited as the first green bond.
The principles
Most issues follow the voluntary Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines published by ICMA. Their four core components are:
- Use of proceeds
- Process for project evaluation and selection
- Management of proceeds
- Reporting
Issuers commonly obtain an external review, such as a second-party opinion. In the EU, the European Green Bond Standard sets a stricter optional label aligned with the EU Taxonomy.
Sustainability-linked bonds
A sustainability-linked bond is not tied to specific projects. Instead its coupon changes, usually stepping up, if the issuer misses stated sustainability targets such as emissions reductions by a certain date.
Credit risk is unchanged
A green or social label does not make a bond safer. Holders rely on the same issuer for repayment, and the bond ranks the same as the issuer's other debt of the same kind.